Growth curve with pen symbolizes the economic situation; source: iStock.com/blackred

© iStock.com/blackred

  • The German economy is facing headwinds from the global economic environment. Domestic economic activity remains strong, while export-oriented industry is experiencing a lean economic period. Following the significant growth in gross domestic product in the first quarter, the outlook for the second quarter currently remains subdued.
  • Industrial output fell sharply in April, while incoming orders in the manufacturing sector stabilised at a low level. In contrast, construction output continued to expand.
  • Bolstered by fiscal policy, incomes are rising, ensuring high consumer demand from private households.
  • The labour market is showing the first signs of the economic slowdown: Gainful employment continues to increase, but a slower rate of growth remains. Unemployment rose in May, which was not only due to special factors.

The German economy remains restrained for the time being. The relatively strong increase in gross domestic product of 0.4% (in price-adjusted terms) in the first quarter of 2019 was primarily due to the strong rise in private consumer spending.[1] The fiscal relief granted at the beginning of the year and some pent-up demand in the purchase of passenger cars are likely to have been additional contributing factors. On the output side, the main contributions to growth came from the services sector. Economic output in the manufacturing sector however declined. Current data suggest that this two-pronged development will continue. The marked decline in new industrial orders since the beginning of the year and the continued worsening of the business climate until May point to continued weak growth in industry. However, important domestic upward forces remain strong. Employment and income are continuing to rise noticeably, investments in the construction industry are increasing at a steady rate, and the government is providing fiscal stimuli. Following restrained growth in the second quarter, the positive forces for growth are expected to exert a stronger influence as the global economic environment gradually improves.

The current trade conflicts are having a negative effect on the global economy. Although the global economy picked up slightly in the first quarter of 2019, the annual growth rate is still relatively low. Following strong growth in the US economy in the first quarter, economic indicators point to a gradual loss of momentum there. The Japanese economy also gained somewhat more momentum recently, but this boost solely came from investments. The weak growth in Europe accelerated only slightly. Development in the emerging economies was rather slow. The pace of growth in the Chinese economy continued to slow. The trade conflict with the US is linked with losses in foreign trade. Even the Russian and Indian economies were unable to maintain their expansion rates recently. Growth in the Brazilian economy was even slightly negative. According to its latest projection from May, the OECD expects global GDP to slow to 3.2% in 2019 from 3.5% in 2018.

The German economy is facing headwinds from the global economic environment. For example, exports of goods and services dropped in April by 3.4% in seasonally adjusted terms and in current prices. The two-month comparison shows a slight decrease of 0.1%. With export prices rising slightly, the decline is likely to be somewhat stronger in real terms. According to the ifo export expectations, companies are still not expecting a clear recovery. For example, nominal imports of goods and services dropped in April by 1.1% in seasonally adjusted terms and in current prices. The two-month comparison shows a slight decrease of 0.1%. Import prices, however, were somewhat higher, which means that imports (in price-adjusted terms) are likely to have seen a slightly bigger decline. At €89.8 billion, the current account surplus in the first four months of 2019 was €2.9 billion lower than in the same period the year before.

The trend in the goods-producing sector is currently pointing in two different directions. While industrial output is slowing, the construction industry is experiencing a boom. Industrial output has followed a downward trend since the end of 2017. In April, production in the manufacturing sector fell sharply, declining by 1.9 %. Production in the construction industry increased slightly (+0.2%), while industry reported a strong decline, down 2.5 %. In the two-month comparison of March/April compared with January/February, industrial production fell by 0.6%, while construction recorded a marked increase in production, up 1.9%. Within industry, the automotive sector reduced its output by 1.9%. The current indicators of new orders and of sentiment suggest that activity in manufacturing will remain subdued in the coming months. Following a sharp decline at the beginning of the year, new orders in the manufacturing sector however stabilised at a low level in the last two months again, against a backdrop of rising foreign demand. In March and April, they rose by 0.8% and 0.3% respectively compared with the previous month, but were still some 5% below their monthly average in 2018. The business climate in the manufacturing sector has been on a noticeable downward trend since the turn of the year 2017/18 and deteriorated slightly once more in May. In the construction industry, however, the boom is likely to continue.

In the first quarter of 2019, private consumer spending rose surprisingly strongly, up 1.2% over the preceding quarter. The last time a similarly large increase in growth was recorded was in the third quarter of 2011. However, retail turnover (excluding vehicles) fell by 2.0% in April compared with the previous month. While in recent months, new car registrations by private owner groups recovered from the WLTP-related slump experienced in autumn of last year, another decline of 2.6% was recorded again in May.

In May, the effects of the economic slowdown became more visible in the labour market. Although the increase in employment is continuing, the momentum has levelled off at a monthly rise of less than 40,000 jobs. According to the unadjusted figures, 45.1 million people were gainfully employed in April. The number of persons working in jobs requiring social insurance payments is also rising at a markedly slower pace. According to the unadjusted figures, unemployment rose slightly in May, reaching 2.24 million. In seasonally adjusted figures, unemployment rose by 60,000 persons compared with the previous month, constituting the first strong increase since May 2014. In addition to the current economic trend, a special factor – the status review relating to Social Code II – played a crucial role in this context. In fact, the economic trend and this special factor accounted for a good half of the increase. The leading indicators suggest that growth in corporate recruitment will be noticeably lower, and that the growth in jobs in industry may even come to a temporary halt. The economic strength of structurally weak regions continues to pose a challenge.

----------------------------

Note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the July edition of the monthly report, Schlaglichter der Wirtschaftspolitik (“Economic policy highlights”, in German only). This report is expected to be available on the website of the Federal Ministry for Economic Affairs and Energy at the end of the 26th calendar week of 2019.

----------------------------

[1] The report is based on statistical data that were available as of 12 June 2019. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.